These 2 retailers have each fallen 13% from their May highs, but analysts and traders say now may be the time to buy the dip.
Analysts are beginning to get bullish on the retail trade.
This week, Deutsche Bank issued Short-Term Catalyst Buy ratings for two retailers pointing to their recent underperformance which may be setting up the stocks for rebounds.
The two names in question? Foot Locker (NYSE: FL) and Kohl’s (NYSE: KSS). Both stocks have outperformed so far this year with Kohl’s up nearly 44% and Foot Locker up more than 45%, outpacing the S&P 500’s gain of 20.5%. The strength in these stocks has come amid improving consumer spending and a return to stores with relaxed social distancing restrictions and widespread vaccine access.
But both stocks are down from their highs earlier this year, with each down 13% from their May 17 highs as the COVID-19 delta variant spooks investors on reopening trades.
The nationwide surge in delta variant cases is also dampening the outlook for the back-to-school season. Deloitte had estimated that back-to-school spending for kids in grades K-12 could reach $32.5 billion this year, up 16% from 2020 and 17% from 2019. But retailers are now saying that customers are delaying or cutting back on their back-to-school shopping in light of delta, and a First Insight survey of 1,038 people found that 56% of respondents say they are proactively cutting back on their retail spending.
“The tail winds that retailers and restaurants have enjoyed recently may be short-lived,” S&P Global Ratings analyst Sarah Wyeth said. “Even if the virus can be contained, other risks appear to be growing. Labor shortages and supply-chain bottlenecks could dampen near-term performance or, worse, persist into the critical holiday shopping season.”
Still, traders say Kohl’s and Foot Locker are worth a look now.
Inside Edge Capital Management founder Todd Gordon said that Kohl’s looks like a better bet on a technical basis now.
“It’s below the 2018 highs, but we held the 200-week moving average very well,” Gordon said, pointing to the chart.
“We’re sort of in a bull flag consolidation, which I think could set up… a move maybe back to the old highs [around] $83,” Gordon added.
Kohl’s shares closed at $55.73 on Thursday. A move to the $83 level implies upside of nearly 49%.
One thing that could boost Kohl’s is its recent deal with Sephora. As part of the deal, the company is expected to add 200 Sephora outlets in Kohl’s stores by this fall, and in 850 sites by 2023. Sephora will also launch on Kohl’s website, offering more than 100 beauty brands.
“That online strategy I think is what’s going to propel them ahead,” Gordon added.
Chantico Global’s Gina Sanchez, however, is liking Foot Locker better now.
“It comes down to a bird in the hand versus two in the bush,” Sanchez said. “Obviously, the outlook for the general retail space is quite bullish and you’re seeing that in the recovery in both stocks.”
“The question is, do you take one that’s already performing for the potential to outperform or do you buy the expectation?” Sanchez added. “I’m actually going to go with the one that’s already performing. It’s slightly cheaper and has some potential upside. So, I’m taking Foot Locker.”
Goldman Sachs analyst Kate McShane likes Foot Locker as well, recently initiating coverage of the stock with a Buy rating and a price target of $70.
McShane wrote in a note that Foot Locker has a strong omnichannel presence, generating “more app downloads than comparable sneaker-selling omnichannel retailers,” adding that the company’s “ongoing real estate rationalization driving higher sales per square foot.”
“We would argue that FL’s stock trading at a similar discount to the market versus where it was 3 years ago, which does not take into account Nike’s (NYSE: NKE) ongoing commitment to cutting the tail of retailers, Under Armour (NYSE: UAA) now becoming more discerning with its accounts, the company’s successful digital penetration, and FL’s ongoing commitment to closing unproductive doors is a positive signal of FL’s potential for upside,” McShane concluded.